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 Handling your debts in the divorce can break you financially if handled incorrectly. Most individuals we meet are more concerned about the asset (property) side of the equation and often overlook the liability (debt) side of the equation. Divorce settlement proceedings often break down when it comes to dividing up the debt in a fair and equitable manner. It is imperative that you have a clear understanding of what you owe individually and jointly when you start the divorce process. How you handle your debts during your divorce can make a big impact on your credit long after the two of you separated.
What Determines How Your Debts are Split?
Did you have a prenuptial agreement in affect that spells out how debts would be split? If not, you will need to consider the laws of the state that you reside in for dividing your debts and assets. Certain states will consider which assets and debts each of the parties brought into the marriage and which assets and debts they took on during the marriage. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), everything that is acquired or owed during the marriage is considered equal. That means if your spouse took on a credit card without your knowledge, you would still be liable for paying that credit card even though your name is not on the account.
How Much Do I Owe? (Individually and jointly)
The first step you should take to protect your credit and to understand what you owe is to pull your credit report from the credit reporting agencies. You have the ability to pull one free credit report per year from each of the three major credit reporting companies. You can obtain the report from the following links: Experian, TransUnion, and Equifax. Take the time to review your credit report. For inactive accounts (zero balances) that are jointly listed, consider closing these accounts to eliminate the risk of creating additional debt that you could be liable for. For accounts that you are listed as the account owner and have your spouse listed as an authorized user, have the spouse removed as an authorized user. You should communicate these actions to your spouse for a number of reasons.
How Do I Handle Joint Debts?
When you are married and you apply for credit together, each of you is agreeing that you are responsible for that debt. While splitting debt in your divorce decree is part of a settlement process, the credit companies are not bound by the divorce decree and still view the debt as jointly owned. For example, if you have 2 credit cards (Visa owed $1,000, MasterCard owed $1,000) that you split during your divorce, you agree to pay off Visa for $1,000 and your spouse agrees to pay off MasterCard for $1,000. Six months after the divorce, you ex-spouse stops paying the MasterCard, you would be liable for the remaining balance. You attorney will probably advise you to have an indemnity clause in your decree if either spouse defaults on joint debt. However, this only gives you the right to go after your ex-spouse for the amount owed (usually through court) which will cost more money. Plus, the indemnity clause is not binding to third parties like the credit card company. It is best to get rid of joint debts prior to the divorce. If you agree to split a jointly owed debt, make sure that the payments are being made in a timely manner or your credit score is going to take a hit. If the payments are not being made, make the payments and keep a record so that you can get these payments back from your ex-spouse through the indemnity clause.
Strategies for Splitting Joint Debt
As you can see from the example above, this scenario can turn into a nightmare. If you have an account that goes into default, you have the potential of having your credit score impacted negatively for up to seven years! We advise our clients that have joint accounts to ask the creditor to convert the accounts to individual accounts. Most companies will not do this and will require you to apply for credit individually. Once you have been approved, you would then split the joint debt by moving it to your new accounts and closing the joint account. If you can’t get credit through conventional sources, you may have to ask family members or even employers to help you out with some short term financing.
Divorce and Bankruptcy
If you have concerns that your ex-spouse may be filing for bankruptcy, you will want to structure your property settlement in a lump-sum agreement if possible. Also, if payments are to be made over a period of time, you may want to have those payments classified as child support or alimony. This can help in protecting you from losing the income in the bankruptcy. Additionally, any joint debt should be split into separate debt where feasible. What this means is, if you have joint credit cards, these open joint credit accounts will be listed in the bankruptcy and will have a negative impact on your ability to get credit in the future. See our Divorce and Bankruptcy article for more information.
For more advice related to handling your debts in divorce, download our ebook: The Financial Divorce, Your Guide To Financial Divorce Knowledge.
 For tax year 2009 and after, the rules for the Child Dependent Exemption Tax Deduction related to divorce have been changed.
The Internal Revenue Service amended the tax code related to the Child Dependency Exemption Deduction. Being able to claim the exemption for your dependent child has many significant tax advantages to the parent claiming the exemption. It is important to understand the summarized rule changes below, so as to not jeopardize your position if you are the parent entitled to claim this valuable exemption.
The changes to the tax code can be summarized as follows:
1. The custodial parent is the parent with whom the child resides the greater number of nights during the year. The non-custodial parent is the parent with whom the child lived with the minority (less than 50%) part of the year. This definition will be used for tax purposes regardless of what the divorce decree may state.
2. You must obtain IRS Form 8332 (Release of Claim to Exemption for Child of Divorce or Divorced Parents) to claim the exemption if you are the non-custodial parent. A divorce agreement or court order can no longer be used to substitute for IRS Form 8332.
If you able to claim your child as a “qualifying child” for the dependency exemption, you may be eligible for the following tax benefits:
Dependent Exemption Deduction
Child Tax Credit
Child and Dependent Care Credit
Education Credit (Hope and Lifetime Learning) or Education Expense Deductions
Earned Income Credit
Head of Household Filing Status
Whether you can take advantage of these credits and the amount of the credits varies depending upon your financial situation. For example, some of these credits phase out at higher income levels making them more valuable to low and middle income filers. As you can see, the tax benefits of being able to claim your child for the Dependent Exemption can be financially advantageous from a tax standpoint. We recommend that you meet with a qualified tax advisor to understand the impact of the financial / tax advantages or disadvantages prior to finalizing your divorce.
For divorcees in the year 2009 and after, if you are going to be considered the non-custodial parent, it is important to follow the IRS guidelines and make sure you include a provision within your divorce decree to obtain a completed IRS Form 8332 from the custodial parent for each child for one or more future tax years. We recommend that you execute this as part of the settlement process. It is often difficult to get an ex-spouse to sign-off on papers after the fact.
If you are interested in additional divorce tips and strategies, please download our eBook: The Financial Divorce – Your Guide to Financial Divorce Knowledge.
 Are you an Injured Spouse?
You are considered to be an injured spouse if you file a joint return and your overpayment of taxes (tax refund) is expected or has been applied (offset) against your spouse’s share of past due federal income tax, student loan, child support, alimony (spousal support), or state income tax. This is different from claiming the innocent spouse relief which will be covered in a separate article.
For example, Spouse A and B file a joint return and have a potential federal tax refund of $ 1,000. Spouse A had been previously married and had an outstanding past due federal tax debt of $2,000 prior to marrying Spouse B. The IRS can offset the past due balance with the potential refund by applying the $1,000 against the $2,000 past due amount. Let’s assume Spouse B’s portion of the refund amounts to 60%. Spouse B could claim Injured Spouse relief (if they meet the requirements below) by filing IRS Form 8379. Spouse B would be entitled to a $600 ($1,000 x 60%) refund and Spouse A would have $400 ($1,000 x 40%) applied against the $2,000 past due federalo income tax.
How Do you Qualify for Injured Spouse Relief?
In the example above, Spouse B, could qualify for injured spouse relief, if they meet the following requirements:
Spouse B is not required to pay the past due amount (Federal Income Taxes)
Spouse B reported earned income (wages, taxable interest, etc..) on the joint return
Spouse B made federal tax payments (tax withholding / estimated tax payments), or claimed refundable credits (i.e earned income credit)
Attached here is the IRS Form 8379 (Injured Spouse Allocation) for viewing or downloading.
IRS Form 8379
If you are interested in additional information related to this topic or additional strategies, please download our eBook: The Financial Divorce – Your Guide to Financial Divorce Knowledge.
We receive inquiries on the topic of CALCULATING CHILD SUPPORT payments and determining the child support guidelines for specific states. Based on these inquiries, we have put together a comprehensive listing of all fifty states with the related links to the child support agencies to help in answering many of your child support questions.
The most common inquiries we receive center around the following:
How do I estimate child support payment amounts?
How is child support calculated by state? (i.e. Texas, California, New York, Florida, Ohio, Illinois, etc)
What are the applicable guidelines for child support in the state I reside?
How do I enforce an order for child support?
How do I track child support payments?
If you are looking for child support enforcement information, please visit our CHILD SUPPORT ENFORCEMENT (CSE) page for specific state information.
Checkout our guide for additional FINANCIAL DIVORCE STRATEGIES for guidance on child support and many other divorce related financial topics.
As mentioned in an earlier article, most states follow the Equitable Property rule when considering how to distribute property. The application of this rule is subjective and ultimately the court has the discretion to allocate property very disproportionately between the spouses, based upon what it considers “just and equitable.”
Non-marital property (such as an inheritance or gift, or property that was attained prior to the marriage) is allocated to the person who owned that property. Marital property is split based upon special needs of the spouse or the children, upon actions against the property (waste, damage, etc.), who purchased the property, and even behaviors during the marriage.
Debt is usually allocated in a similar manner, based upon subjective factors such as who took on the debt, what it was used for, ability to pay back the debt, and again – behaviors during the marriage.
Lawyers in equitable property states are well-versed in helping you fight for what is a “just” distribution. However, if you can come up with a property settlement that you both agree on, you will save time and money in the courts. You can enlist the help of a mediator, which should be less expensive than an attorney.
When it comes time to negotiate a fair settlement, make sure to account for the true value of the associated property. For example, if you determine that the fair market value of the property is $300,000 and the associated mortgage on the property is $230,000, the amount that you will be negotiating over is approximately $70,000.
If you plan to transfer the home and you have unpaid real estate taxes of $5,000, you will want to deduct that from the $70,000, which would leave $65,000 to negotiate.
If you plan to sell the real estate, you will want to account for the associated sales costs which would include sales commissions of $18,000 (6% of the sales price – $300,000 x 6%), other fees associated with the sale (i.e. title fees) and any other outstanding assessments that will the net amount. If the case above, you would then have around $47,000 ($65,000 – $18,000) to negotiate.
If you are over the capital gain exclusion limit or have used your exclusion in the past, you would also want to consider the potential tax impact of the sale as well, thus reducing the amount to negotiate further.
Many people find themselves in marriages that are destructive but are too intimidated by the process and the unknowns to know where to start. This is one of the reasons divorce lawyers make so much money – they help people navigate the system, and are a shoulder to lean on in a very tough time. Clearly, your lawyer is extremely valuable for certain things but if you want to save expense then you need to do as much as you can in prep. If you can gather information about your finances, get organized, and begin planning what you want your post-marriage life to look like on your own, you will save significant money.
In addition to the expense that can be avoided, it’s important that you understand that your lawyer may not have a strong financial background! Attorneys are not required to be CPAs or Financial Planners so you cannot expect them to be your advocate in those areas, despite their best intentions. Your laywer may not know the tax impacts of certain decisions down the road. He may be strong on tax impact but not have enough experience with retirement benefit settlements. The message to take away is: the more you can self-educate, the more you can ensure that after the divorce, you are financially strong.
Every minute spent self-educating could translate into thousands of dollars saved in potential child support, alimony, taxes, property settlements and legal fees. It is overwhelming but you can do it. Keep reading, keep thinking about what you want, and take advantage of the resources that are out there to help you through this tough time.
If you are interested in additional information related to this topic or additional strategies, please download our eBook: The Financial Divorce – Your Guide to Financial Divorce Knowledge.
We receive many questions on the topic of enforcing child support payments. The individual state Child Support Enforcement (CSE) sites listed below can answer many of your questions. The most common questions center around the following:
Enforcing child support orders
Locating absent parents and their property
Getting an order of paternity, if the father needs to be identified legally
Getting an order for cash child support, if needed
Getting and enforcing an order for health insurance coverage for a child, and
Tracking support payments.
If you know of pages missing below, or problems with existing addresses, please let us know and we will update the links.
If you are interested in additional information related to this topic or additional strategies, please download our eBook: The Financial Divorce – Your Guide to Financial Divorce Knowledge.
It’s important to consider your life insurance needs prior to the divorce so that you can include appropriate provisions into your settlement.
If you pass while married, in most states, the property passes to the spouse who then presumably passes property along to their children. Divorce makes these decisions and inheritance paths more complicated and requires more thought and planning. Consider the following.
- A good practice is to have the divorce agreement specify the amount of insurance coverage your ex-spouse is required to maintain especially if they are paying child support or alimony. Should something happen to your ex-spouse, the insurance proceeds could be used to continue paying child support for your dependents or alimony to you.
- If you are the owner of a non-employer sponsored life insurance policy, you will want to change the beneficiary designation and allocations.
- If you are the owner of a policy where the insured is your ex-spouse, you should transfer ownership to your ex-spouse. It is up to your ex-spouse to change the beneficiaries on the insurance policies he/she is provided with or owns. You are not responsible for paying the premiums on policies that he/she owns unless directed through your divorce settlement.
- If you become the primary financial supporter of your dependents following the divorce, you will need to consider whether the amount of coverage you have in place is now adequate. You may want to increase the amount of insurance you are carrying – understand that there is an associated cost of increasing your insurance. That cost could impact your settlement terms.
In a future article we will address other insurance needs post-divorce, and the impact of the divorce on beneficiary decisions. These topics are covered in The Financial Divorce -Your Guide to Financial Divorce Knowledge.
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